There Are Better Consumer Staples Index Choices Than XLP

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About: Consumer Staples Select Sector SPDR ETF (XLP), Includes: FSTA, RHS, VDC
by: Strubel Investment Management
Summary

All three top consumer staples fund track similar indices and have virtually identical returns.

Investors are best off picking the cheapest fund, FSTA.

There is also an equal weighted staples index that offers investors more diversification which could interest some investors.

The Consumer Staples Select Sector SPDR Fund (XLP) is the largest, most heavily traded (according to ETFdb.com) consumer staples fund. However, there may be better options for investors. There are several similar staples funds, which have lower expenses (although the absolute difference is small). There is also an equal-weighted staples fund that may offer better diversification.

XLP and Competitors

XLP tracks the Consumer Staples Select Sector Index and has an expense ratio of .13%. The index is basically market-weighted, and the fund contains 33 holdings. The other popular staples index funds track larger indices with approximately 90 holdings.

The Vanguard Consumer Staples ETF (VDC) and the Fidelity MSCI Consumer Staples Index (FSTA) both track the MSCI USA IMI Consumer Staples Index and charge .10% and .08% annually, respectively. The only difference between the two is the Vanguard offering tracks a slightly different version of the index, the 25/50 variant, which limits the weight of any single issuer to 25% and the total weight of all issuers larger than 5% to 50% of the fund.

Right now, there is no immediate issue of any stock breaching the 25% weighting limit. The total of all 5% or larger holdings is around 45%, so if the staples sector continues to consolidate or market gains accrue to only the largest stocks, then there could be significant weighting differences between VDC and FSTA in the future. However, two of the largest holdings are Coca-Cola (KO) and PepsiCo (PEP). Given that soda consumption is falling, there probably isn’t much danger in these stocks gaining significant ground compared to the rest of the staples index. The largest holding, Procter & Gamble (PG) also isn’t setting the world on fire with stellar growth, so there probably isn’t much risk in it growing to be an even larger share of the index. Altogether, the Vanguard and Fidelity funds are likely to track the same index for all intents and purposes for the foreseeable future.

However, the staples sector is extremely top-heavy. Indeed, XLP has almost 70% of its assets in the top ten holdings.

(Graphic source: fund website)

Because of the top-heavy nature of the sector performance, annual returns have been virtually identical for all three funds. (You may notice we snuck in another fund, RHS, which we’ll discuss shortly.)

Ticker

5YR Annual Avg. Ret.

10YR Annual Avg. Ret.

XLP

8.29%

13.34%

VDC

8.28%

13.71%

FSTA

8.20%

n/a

RHS

9.73%

16.36%

(Source: Fund websites)

Investors who are looking for a market-weighted staples ETF should simply pick the cheapest offering, currently Fidelity’s, and go with that. The minor differences between the funds in the indices tracked are too small to make a big difference in returns. However, there is one staples index fund out there that may offer an additional benefit.

The Invesco S&P 500 Equal Weight Consumer Staples ETF

As we mentioned before, the staples sector is very top-heavy, with the top ten stocks accounting for almost 70% of the entire sector. That means the other 20-80 stocks in the sector account for very little in the way of returns. Enter the Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS). While the fund's expense ratio is a bit high (seriously, .40% for a simple equal-weighted index?) it is far more diversified than the other staples funds.

The fund holds the 33 largest staples sector stocks all equally weighted. The result is a fund that’s much more diversified by stock. It also significantly shifts the sub-sector weights as well. The graphic below shows the weighting for XLP on the left and RHS on the right.

(Graphic source: Author composite from fund websites)

RHS generally puts less emphasis on the household products and beverages sector and more on the food and personal products sectors. Again, given the challenges some of the stocks that are in the top holdings of market-weighted staples indices, we think there is a good possibility an equal-weighted staples index could be a better choice for investors who want exposure to the staples sector.

Summary

Although we aren’t fans of the sector as a whole (low growth, combined with valuations that are still high), for investors looking for a market-weighted staples index Fidelity’s offering, FSTA, looks the best. However, the equal-weighted RHS fund has some powerful diversification advantages over traditional market-weighted indices and deserves serious consideration by investors when looking for a staples fund.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.